A California court of appeals, in Richey v AutoNation, Inc, reversed the judgment of a lower court that had confirmed an arbitration award upholding an employer’s termination of an employee based on its honest belief that the employee was misusing his medical leave by working part-time in a restaurant that he owned. With regard to the employee’s claims under the Moore-Brown-Roberti Family Rights Act (CFRA) and its federal corollary, the federal Family and Medical Leave Act (FMLA), the federal Family and Medical Leave Act (FMLA), the arbitrator identified the issue as “whether the law provides a protective shell over the employee that barred his termination until he is cleared to return to work by his physician, or does the law allow an employer to let an employee go, while on approved leave, for non-discriminatory reasons?”

In finding that AutoNation was allowed to terminate the employee because it had a reasonable belief that he was abusing his medical leave, the arbitrator applied the burden-shifting analysis of McDonnell-Douglas for discrimination claims to the employee’s CFRA claim, and improperly allowed a good faith defense adopted by a minority of federal circuits, but rejected by the Ninth Circuit. The arbitration agreement required to arbitrator to decide claims “solely upon the law governing claims and defenses set forth in pleadings” and barred the arbitrator from invoking any basis other than such controlling law.

In terminating or failing to reinstate an employee who had been granted leave under the CFRA, an employer may not defend a lawsuit based on its honest belief the employee was abusing his leave, concluded the appeals court in finding that the arbitrator’s ruling abridged an important public policy. Rather, the court ruled that the employer must demonstrate evidentiary facts sufficient to carry the burden of proof imposed by CFRA.

Honest belief defense. The appeals court found that the honest belief defense is incompatible with California statutes, regulations and case law, and deprived the employee of his unwaivable statutory right to reinstatement under CFRA, Sec. 12945.2, subdivision (a). The arbitrator committed clear legal error in basing his decision solely on the employer’s honest belief that the employee had abused his leave, declared the appeals court. Under the CFRA’s statutory scheme, the burden of proof was on the employer to justify any refusal to reinstate the employee. However, the arbitrator concluded that it was determinative of the employee’s CFRA claim as a matter of law, that the employer held an “honest belief,” after a “superficial investigation,” that the employee had violated company policy barring outside employment during his CFRA leave. In doing so, the arbitrator improperly imposed the burden of proof on the employee rather than the employer.

No California case supported the arbitrator’s conclusion that an employer may rely solely on its subjective, albeit honest, belief an employee had engaged in misconduct to justify its denial of an employee’s CFRA rights. Consequently, the appeals court rejected the employer’s contention that it could simply rely on an imprecisely worded and inconsistently applied company policy to terminate an employee on CFRA leave without adequately investigating and developing sufficient facts to establish the employee had actually engaged in misconduct warranting dismissal.

Governing law requirement. Here, the arbitration agreement required the arbitrator to resolve the dispute “based solely upon the law governing the claims and defenses set forth in the pleadings” and specifically to avoid imposing any quasi-legal principles. Thus, the arbitrator’s failure to address all of the employee’s statutory CFRA claims and his reliance on a legally unfounded equitable defense to vitiate those claims warranted closer scrutiny of the award than might otherwise be appropriate.

The arbitrator’s acceptance of the honest belief defense precluded the employee from having his nonwaivable CFRA claims heard on the merits. The honest belief defense relieved the employer of any obligation to establish the employee was, in fact, misusing authorized family leave and so subverted the express statutory guarantee of the right to reinstatement, as well as the allocation of the burden of proof in an interference case. Although the arbitrator made multiple observations tending to support the employee’s position, he failed to make findings of fact and conclusions of law sufficient to ensure he complied with the requirements of the statute. Moreover, the arbitrator failed to consider the employee’s retaliation claims regarding whether the employer applied its CFRA policies consistently to different employees, and whether it discharged the employee because he took CFRA leave.